Chapter 5Monetary Policy, Fiscal Policy, and the Government Budget
1)The three ways of reducing a government budget deficit are to
A)decrease government spending, reduce consumption, increase the tax rate.
B)increase government spending, decrease real income, reduce the tax rate.
C)decrease government spending, increase real income, reduce the tax rate.
D)decrease government spending, increase real income, increase the tax rate.
Figure 5-1
2)Employing the government budget diagram shown in Figure 5-1, assume that the economy is initially in equilibrium at point A. The movement A to D represents
A)an increase in government spending and/or a decrease in taxes.
B)a decrease in government spending and/or an increase in taxes.
C)a decrease in government spending and a decrease in taxes.
D)an increase in government spending and an increase in taxes.
3)In Figure 5-1, the impact of automatic stabilization is depicted by the movement from
A)A to F.
B)A to B.
C)A to C.
D)D to A.
4)In Figure 5-1, if the budget line is BB0 and the natural real GDP is $5300, the structural surplus or deficit is
A)FC.
B)AD.
C)FA.
D)none of the above.
5)In Figure 5-1, if the budget line BB0, the natural real GDP is $5300, and actual real GDP is $5000, then the cyclical budget surplus or deficit is the
A)horizontal distance between A and F.
B)vertical distance between F and D.
C)vertical distance A and F.
D)horizontal distance between B and D.
6)An increase in the tax rate (t)
A)will rotate the budget line upward.
B)will increase the slope of the budget line.
C)will shift the budget line downward.
D)a and b.
7)The natural employment surplus is
A)G + T.
B)Y - tYN.
C)tYN - G.
D)YN + G + tYN.
8)The structural deficit is
A)the difference between the actual deficit and the natural employment deficit and it increases whenever income rises.
B)identical to the natural employment deficit and it decreases whenever tax rates are cut.
C)identical to the natural employment deficit and it increases whenever the natural level of output increases.
D)identical to the natural employment deficit and it decreases whenever the natural level of output increases.
9)The structural surplus is
A)the difference between the actual surplus and the natural employment surplus and it increases whenever income rises.
B)identical to the natural employment surplus and it increases whenever tax rates are cut.
C)identical to the natural employment surplus and it decreases whenever the natural level of output increases.
D)identical to the natural employment surplus and it increases whenever the natural level of output increases.
Figure 5-2
10)Using the information contained in Figure 5-2, the initial equilibrium Y is 3500. If there is 500 of new fiscal stimulus and a constant money supply, Y will increase to ______and the interest rate will ______.
A)4000; remain constant
B)4000; rise to 10%
C)4500; rise to 12.5%
D)5500; remain constant
11)Which of the following effects takes place as a result of automatic stabilization?
A)extra tax revenues are generated in a boom
B)tax revenues remain constant during a recession
C)leakages increase during a recession, helping to stimulate the economy
D)Both A and C are correct.
12)The "crowding-out" effect refers to the fact that
A)fiscal policy cannot be used to shift the IS curve.
B)rising interest rates tend to accompany an expansionary fiscal policy.
C)there may be a liquidity trap.
D)All of these.
13)Suppose the government increases its expenditures by $100 billion and simultaneously reduces the money supply by $100 billion. We definitely know that
A)equilibrium GDP will fall.
B)equilibrium GDP will rise.
C)the interest rate will rise.
D)the interest rate will fall.
14)The effect on the IS curve of a reduction in taxes will be less the
A)flatter is the LM curve.
B)steeper is the LM curve.
C)greater the extent of "crowding out."
D)greater is the marginal propensity to save.
15)Fully accommodating monetary policy results in
A)a constant interest rate.
B)the simple fiscal-policy multiplier of Chapter 3.
C)an increase in the money supply when there is a rise in government spending.
D)All of these.
Figure 5-3
16)If Figure 5-3 is to show the result of a "fully accommodating" monetary policy following a shift of the IS curve from IS0 to IS1, what is the initial level of real income and interest rate before these changes?
A)3500; 7.5%.
B)4500; 12.5%.
C)5500; 7.5%.
D)4500; 2.5%.
17)Given the level of real GDP, the equilibrium level of the interest rate depends on the
A)demand for money.
B)monetary-fiscal policy mix.
C)size of the multiplier.
D)extent of crowding out.
18)The fiscal-policy multiplier will be greater
A)the greater is the interest responsiveness of the demand for money.
B)the smaller is the interest responsiveness of autonomous expenditures.
C)the smaller is the income responsiveness of the demand for money.
D)All of the above tend to make the fiscal-policy multiplier greater.
19)For a given level of equilibrium GDP, a tight-money/easy-fiscal policy mix compared with easy-money/tight-fiscal policy mix implies a
A)lower interest rate.
B)lower level of investment.
C)higher level of taxation.
D)lower level of government expenditures.
20)If a given fiscal policy is fully accommodated by monetary policy, then
A)GDP will remain constant.
B)the interest rate will remain constant.
C)GDP and the interest rate will move in the same direction.
D)GDP and the interest rate will move in the opposite direction.
21)If the IS curve is negatively sloped and the LM curve is positively sloped
A)an increase in government expenditures will raise real GDP and lower interest rates.
B)a fall in the real money supply will raise real GDP and lower the interest rate.
C)an increase in taxes and an increase in money supply will lower the interest rate and give little or no change in real GDP.
D)an increase in taxes and a fall in the money supply will raise the interest rate and give little or no change in real GDP.
22)An increase in transfer payments would have the same short run effect on the government deficit as an equal
A)increase in government expenditures.
B)reduction in taxes.
C)increase in taxes.
D)Both A and B.
23)A deliberate change in the government's deficit
A)constitutes discretionary fiscal policy.
B)leads to automatic stabilization.
C)acts as a drag on the economy.
D)is implemented by the Fed.
24)We can infer that the government is following a restrictive fiscal policy when
A)the actual deficit falls.
B)the natural employment deficit falls.
C)the actual deficit rises.
D)the natural employment deficit rises.
25)We can infer that the government is following a restrictive fiscal policy when
A)the actual surplus falls.
B)the natural employment surplus falls.
C)the actual surplus rises.
D)the natural employment surplus rises.
26)Monetary restraint and fiscal stimulus will
A)both lower the real rate of interest.
B)both raise the real rate of interest.
C)have differing effects on the real rate of interest.
D)Both raise the level of output.
27)When (if at all) can the crowding-out effect be prevented?
A)when the Fed decreases the money supply to accommodate the expansionary fiscal policy
B)when the real money supply is held constant
C)when the real balance effect is working
D)when the Fed allows the real money supply to increase sufficiently to keep the interest rate from rising
28)During the fiscal expansion associated with the Vietnam war, what type of expenditures was initially "crowded out?"
A)autonomous consumption
B)nonresidential fixed investment
C)residential construction
D)nonresidential construction
29)Which of the following events occur when fiscal expansion is used without accommodating monetary policy?
A)total government spending increases (or net taxes decrease)
B)total private induced spending increases
C)private induced spending decreases
D)A and B are both correct.
30)The actual government budget deficit ______be used to determine the effectiveness of discretionary fiscal policy actions because ______.
A)cannot; it excludes non-discretionary spending changes
B)can; it includes non-discretionary spending changes
C)cannot; it includes non-discretionary spending changes
D)can; it excludes automatic stabilization expenditures
31)The actual government budget surplus ______be used to determine the effectiveness of discretionary fiscal policy actions because ______.
A)cannot; it excludes non-discretionary spending changes
B)can; it includes non-discretionary spending changes
C)cannot; it includes non-discretionary spending changes
D)can; it excludes automatic stabilization expenditures
32)The natural employment deficit ______be used to determine the effectiveness of discretionary fiscal policy actions because ______.
A)cannot; it excludes non-discretionary spending changes
B)can; it includes non-discretionary spending changes
C)cannot; it includes non-discretionary spending changes
D)can; it excludes automatic stabilization expenditures
33)The natural employment surplus ______be used to determine the effectiveness of discretionary fiscal policy actions because ______.
A)cannot; it excludes non-discretionary spending changes
B)can; it includes non-discretionary spending changes
C)cannot; it includes non-discretionary spending changes
D)can; it excludes automatic stabilization expenditures
34)The progressive income tax is an automatic stabilizer with respect to the Federal government's budget surplus or deficit because
A)individuals must "automatically" pay taxes even when they have a deficit.
B)during periods of output growth, a greater percentage of real income "leaks" from the expenditure stream.
C)during periods of output growth, the marginal leakage rate increases as taxes decrease.
D)None of the above.
35)In the 1980s, expansionary fiscal policy is believed to have crowded out
A)domestic investment as interest rates rose.
B)exports and imports as interest rates rose.
C)exports but not domestic investment as interest rates rose.
D)domestic investment as interest rates fell.
36)If the demand for money was totally independent of the interest rate, the LM curve would ______and monetary policy would ______.
A)have a positive slope, quite powerful
B)have a positive slope, impotent
C)be vertical, quite powerful
D)be vertical, impotent
37)An increase in the real money supply will have its maximum effect on the equilibrium level of GDP when the
A)LM curve is vertical.
B)LM curve is horizontal.
C)IS curve is vertical.
D)IS curve is negatively sloped.
38)A steep LM curve implies that
A)an increase in government spending will change output by a relatively small amount.
B)a decrease in taxes will change output by a relatively small amount.
C)changes in government spending and taxes will have a large multiple effect on output.
D)A and B.
39)A flat LM curve implies that
A)an increase in government spending will change output by a relatively small amount.
B)a decrease in taxes will change output by a relatively small amount.
C)changes in government spending and taxes will have a large multiple effect on output.
D)A and B.
40)A steep IS curve implies that
A)an increase in money supply will change output by a relatively small amount.
B)a decrease in taxes will change output by a relatively small amount.
C)changes in money supply will have large multiplier effects on output.
D)A and B.
41)A flat IS curve implies that
A)an increase in money supply will change output by a relatively small amount.
B)a decrease in taxes will change output by a relatively large amount.
C)changes in money supply will have large multiplier effects on output.
D)A and B.
42)Monetary policy will have a large income effect provided the
A)IS curve is flat.
B)LM curve is steep.
C)IS curve is steep.
D)LM curve is flat.
43)Monetary policy will have a large income effect provided the
A)sensitivity of autonomous spending to interest rates is high.
B)sensitivity of autonomous spending to interest rates is low.
C)sensitivity of output changes to interest rates is small.
D)None of the above.
44)If spending is not responsive to changes in the interest rate, then
A)the Fed is "impotent."
B)tax policy is "impotent."
C)fiscal policy is "impotent."
D)the Fed is "potent."
45)Complete "crowding-out" describes the situation in the economy when
A)fiscal policy is effective in changing output.
B)the shift in the LM curve by monetary policy is "impotent."
C)the shift in the IS curve by fiscal policy is "impotent."
D)fiscal policy crowds out monetary policy.
46)If a 200 billion dollar increase in government spending occurs when the Fed seeks to maintain a fixed interest rate then
A)there is no crowding out, the LM curve shifts to offset the shift in the IS curve.
B)there is no crowding out, the monetary policy is fixes as is the LM curve fixed.
C)crowding out is assured since monetary policy is fixed.
D)crowding out is assured since the Fed will accommodate the spending increases.
47)A "tight" money, easy "fiscal" policy combination will be preferred by society which values
A)low growth rates, but more goods and services in the future.
B)public goods today greater than private goods in the future.
C)private goods today more than public goods in the future.
D)public and private goods in the future more than public and private goods today.
48)A "easy" money, tight "fiscal" policy combination will be preferred by society which values
A)low growth rates, but more goods and services in the future.
B)public goods today greater than private goods in the future.
C)private goods today more than public goods in the future.
D)public and private goods in the future more than public and private goods today.
49)The relation S + (T – G) = I + NX describing the equilibrium of an economy explicitly demonstrates
A)deficit spending by the government reduces either investment and/or net foreign investment.
B)deficit spending reduces private saving (assuming net foreign investment remains unchanged).
C)as private saving increases net foreign investment must decrease, exports decline.
D)as private saving increases the deficit must decline if investment decreases.
50)In the 1980s national savings declined as a percentage of GDP. Assuming that domestic private investment's percentage share has not declined, this situation requires, ceteris paribus,
A)net foreign investment (NX) to decrease.
B)net foreign investment (NX) to increase.
C)U.S. exports to decrease.
D)A and C are both necessary outcomes.
51)During the 1990s Japan’s economy experienced
A)a tripling of values in the stock market.
B)negligible inflation and unemployment rates.
C)falling short-term interest rates.
D)All of the above.
52)In a “liquidity trap”
A)the demand for money is infinite.
B)the LM curve is a vertical line.
C)the nominal interest rate on short-term assets is relatively high.
D)money supply changes have a strong impact on interest rates.
53)In a liquidity trap, the
A)IS curve is vertical.
B)IS curve is horizontal.
C)LM curve is vertical.
D)LM curve is horizontal.
54)According to Paul Krugman, during the past decade Japan’s macroeconomic policy should have incorporated which of the following?
A)stimulatory monetary policy.
B)stimulatory fiscal policy.
C)monetization of the debt by the central bank.
D)All of the above.
55)The practice of “monetizing the debt” is traditionally feared because it is thought to cause
A)unemployment.
B)inflation.
C)a falling price level.
D)a liquidity trap.
.
56)Persistent government budget deficit result in _____ taxes and a _____ stock of capital in the future.
A)higher, larger
B)lower, larger
C)higher, smaller
D)lower, smaller
57)The cyclical deficit is
A)the amount by which the actual government budget deficit exceeds the structural deficit.
B)the amount by which structural deficit exceeds the actual budget deficit.
C)the same as the structural deficit.
D)what the budget deficit would be if the economy were operating at the natural real GDP level.
58)A structural budget deficit
A)appeared during the Vietnam War era from 1966-68.
B)appeared after 1982 due to tax cuts and spending increases.
C)peaked at 5 percent of GDP in mid-1986 and had become a structural surplus by 1997.
D)all of the above.
59)Historical data suggests that a trend toward _____ natural employment ______.
A)larger, deficits from the early 1960s to the mid-1980s.
B)larger, surpluses form the early 1960s to the mid-1980s.
C)smaller, surpluses form the mid-1980s to 1995.
D)larger, surpluses from the mid-1980s to 1995.
60)The 2001 recession was caused principally by
A)a slowing in the growth of the money supply.
B)a drop in autonomous consumption spending.
C)a decrease in government spending
D)a drop in real business investment.
61)The economic policy response to the 2001 recession consisted of
A)a rapid change in fiscal policy and monetary policy.
B)a sluggish change in fiscal policy and monetary policy.
C)a rapid change in fiscal policy and a sluggish change in monetary policy.
D)a sluggish change in fiscal policy and a rapid change in monetary policy.
62)A government budget surplus
A)decreases a country's ability to finance domestic and foreign investment.
B)increases a country's ability to finance domestic and foreign investment.
C)increases a country's ability to finance domestic investment and decreases its ability to finance foreign investment.
D)decreases a country's ability to finance domestic investment and increases its ability to finance foreign investment.
63)In the period 1980-92, United States net national saving fell due to
A)large budget deficits and an increase in private saving.
B)small budget deficits and a decrease in private saving.
C)small budget deficits and an increase in private saving.
D)large budget deficits and a decrease in private saving.
64)A crucial national income accounting identity sets the government budget deficit equal to
A)S - I - NX.
B)S + I - NX.
C)S - I + NX.
D)S + I + NX.
65)A government budget deficit is financed by a combination of
A)saving rising relative to domestic investment and imports rising relative to exports.
B)saving rising relative to domestic investments and exports rising relative to imports.
C)domestic investment rising relative to saving and imports rising relative to exports.
D)domestic investment rising relative to saving and exports rising relative to imports.
66)Suppose we are modeling a "closed" economy. The only way its government can obtain more goods and services than it can claim with net tax revenues is for
A)exports to exceed imports.
B)imports to exceed exports.
C)investment to exceed saving.
D)saving to exceed investment.
67)Suppose we have an economy for which G = 300, T = 240, S = 80, I = 45, and imports = 40. Exports must be
A)25.
B)40.
C)15.
D)65.
E)-25.
68)In the late 1980s the U.S. government ran a succession of large budget ______which resulted mainly in ______crowding-out.
A)deficits, domestic
B)deficits, international
C)surpluses, domestic
D)surpluses, international
69)Suppose we have an economy for which G = 1100, T = 800, S = 230, and I = 230. If I falls to 150, the economy's trade deficit